IAS 23
Active
Borrowing Costs
Prescribes the accounting treatment for borrowing costs, including when they should be capitalised as part of the cost of a qualifying asset.
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Conceptual Framework Linkage
Why some borrowing costs become part of an asset's cost
The Conceptual Framework defines the cost of an asset as everything necessary to bring it to its intended condition and location for use. For assets that take a SUBSTANTIAL period to construct, the interest cost of financing that construction is genuinely part of getting the asset ready – not merely a cost of financing operations generally.
HOW IAS 23 MAPS TO THE FRAMEWORK
Directly attributable costs – borrowing costs directly attributable to a qualifying asset's construction are, by their nature, as much a part of "bringing the asset to its intended use" as materials and labour Matching over the construction period – capitalisation defers the interest expense from the construction period into the FUTURE periods the asset will generate benefits, via depreciation All other borrowing costs – expensed as incurred, since they relate to the general financing of the entity's activities, not to bringing a specific asset to use
IAS 23's core rule is deceptively narrow: capitalisation applies ONLY to qualifying assets under construction – it is NOT a general election to capitalise financing costs, and the 2007 revision eliminated the "expense immediately" option that previously existed as an alternative treatment.
Measurement principles applied
IAS 23 measures capitalised borrowing cost by reference to ACTUAL cost incurred, using either a direct trace (specific borrowings) or a weighted-average approach (general borrowings) – never an estimate of hypothetical financing cost.
Borrowing typeCapitalisation basis
Specific borrowingsActual costs incurred, LESS any investment income earned on temporary investment of unused funds
General borrowings poolWeighted average capitalisation rate applied to expenditure on the qualifying asset
Qualitative characteristics in action: the requirement to offset investment income from temporarily investing unused specific borrowing proceeds reflects faithful representation – only the NET cost of financing genuinely attributable to the asset should be capitalised.
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Scope & Applicability
What IAS 23 covers
IAS 23 requires capitalisation of borrowing costs directly attributable to the acquisition, construction, or production of a QUALIFYING ASSET as part of the cost of that asset – mandatory, not optional, since the 2007 revision.
SCOPE EXCLUSIONS
Qualifying assets measured at FAIR VALUE (e.g. biological assets under IAS 41) – no need to capitalise since fair value already reflects economic reality Inventories manufactured, or otherwise produced, in LARGE QUANTITIES on a REPETITIVE basis, even if they take a substantial period to get ready – a specific carve-out
Borrowing costs INCLUDE interest expense calculated using the effective interest method (IFRS 9), finance charges on IFRS 16 lease liabilities, and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.
Key definitions you must know
Qualifying asset
An asset that necessarily takes a SUBSTANTIAL PERIOD OF TIME to get ready for its intended use or sale.
Borrowing costs
Interest and other costs an entity incurs in connection with the borrowing of funds.
Capitalisation rate
The weighted average of borrowing costs applicable to the general borrowings outstanding during the period, OTHER than borrowings made specifically for the purpose of obtaining a qualifying asset.
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Qualifying Assets – Identifying What Counts
Typical examples
Inventories requiring a substantial period to bring to a saleable condition (e.g. maturing whisky, wine) Manufacturing plants and power generation facilities under construction Investment property under construction (IAS 40) "Bearer plants" during their development period (IAS 41 carve-out to IAS 16) Intangible assets under development, if construction takes a substantial period (e.g. certain internally developed software)
What is NOT a qualifying asset
Financial assets, and inventories manufactured/produced repetitively in large quantities over a short period Assets that are ready for their intended use or sale WHEN ACQUIRED Assets measured at fair value (e.g. biological assets under IAS 41)
"Substantial period" is deliberately undefined by a bright-line time threshold in IAS 23 – it is a matter of judgement based on the specific circumstances, though many entities apply a rule of thumb of around 12 months as a starting point for assessment.
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Capitalisation – Specific Borrowings
The specific borrowing formula
Capitalised amount = Actual borrowing costs incurred on the specific loan − Investment income earned on temporary investment of the unused loan proceeds
Where funds are borrowed SPECIFICALLY for a qualifying asset, the entity can directly trace the actual costs incurred – but any surplus funds not yet spent, temporarily invested, generate investment income that must be DEDUCTED before capitalisation.
Worked example – specific loan with temporary investment
Example 1: Specific borrowing for a factory build
An entity borrows $2,000,000 specifically to fund construction of a new factory, at 6% p.a. interest, on 1 January. Construction commences immediately. The full amount is drawn down at once, but only $1,200,000 is spent on construction in the first 3 months; the remaining $800,000 is temporarily invested at 3% p.a. for those 3 months before being fully utilised.
Interest incurred on the loan (full year) = 2,000,000 × 6% = $120,000
Investment income earned = 800,000 × 3% × 3/12 = $6,000
Net amount capitalised = 120,000 − 6,000 = $114,000
Investment income earned = 800,000 × 3% × 3/12 = $6,000
Net amount capitalised = 120,000 − 6,000 = $114,000
Dr
PPE – factory under construction $114,000
SOFP
Cr
Interest expense / cash $114,000
SOPL offset
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Capitalisation – General Borrowings Pool
Weighted average capitalisation rate – with worked example
When funds are borrowed GENERALLY and used, at least in part, for a qualifying asset, the entity applies a CAPITALISATION RATE (the weighted average of all general borrowings outstanding during the period) to the expenditure on the asset. The amount capitalised in a period must NOT exceed the total borrowing costs actually incurred during that period.
Example 2: General borrowings pool
An entity has two general borrowings outstanding throughout the year: a $3,000,000 loan at 5% and a $1,500,000 loan at 7%. Qualifying asset expenditure averaged $1,000,000 during the year (weighted for timing of spend).
Weighted average capitalisation rate = [(3,000,000 × 5%) + (1,500,000 × 7%)] ÷ (3,000,000 + 1,500,000)
= (150,000 + 105,000) ÷ 4,500,000 = 255,000 ÷ 4,500,000 = 5.67%
Borrowing costs capitalised = 1,000,000 × 5.67% = $56,700 (capped at total borrowing costs incurred in the period, if lower)
= (150,000 + 105,000) ÷ 4,500,000 = 255,000 ÷ 4,500,000 = 5.67%
Borrowing costs capitalised = 1,000,000 × 5.67% = $56,700 (capped at total borrowing costs incurred in the period, if lower)
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Commencement, Suspension & Cessation of Capitalisation
The three conditions for commencement
Capitalisation COMMENCES on the date the entity FIRST meets ALL of the following:
It incurs expenditures for the asset It incurs borrowing costs It undertakes activities necessary to prepare the asset for its intended use or sale (includes technical/administrative work before physical construction, e.g. obtaining permits – but NOT merely holding an asset with no development activity)
Suspension & cessation
Suspension – capitalisation is SUSPENDED during EXTENDED periods in which active development is interrupted (does NOT apply to brief, normal delays or delays that are a NECESSARY part of the process, e.g. concrete curing time) Cessation – capitalisation CEASES when substantially all activities necessary to prepare the asset for intended use/sale are complete – even if minor finishing work remains, or a section is not yet fully occupied
For assets completed in PARTS capable of being used while other parts continue under construction (e.g. a business park built in phases), capitalisation ceases for each part as it becomes ready for use, even if the overall project continues.
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Investment Income Offset – Recap & Deeper Example
When the offset does – and doesn't – apply
The investment-income deduction rule (Section 4) applies ONLY to SPECIFIC borrowings, where temporarily unused funds from that SAME specific loan are invested. It does NOT apply to the general borrowings pool – no similar deduction is made against the weighted-average capitalisation rate calculation for surplus general funds invested elsewhere.
A common exam trap: students sometimes try to net investment income against the GENERAL pool capitalisation rate – the netting rule is EXCLUSIVE to specific, traceable borrowings.
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Carrying Amount vs Recoverable Amount
The impairment interaction
When the carrying amount, or the expected ultimate cost, of a qualifying asset EXCEEDS its recoverable amount or net realisable value, the carrying amount is WRITTEN DOWN or written off in accordance with the requirements of OTHER Standards (typically IAS 36 for PPE/intangibles, or IAS 2 for inventories) – capitalised borrowing costs do NOT escape the normal impairment testing rules simply because they represent financing cost rather than construction cost.
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Disclosure Requirements
Required disclosures
MANDATORY DISCLOSURES
Amount of borrowing costs capitalised during the period The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation (where general borrowings are used)
CONTEXT FOR USERS
These disclosures allow users to assess how much of an entity's reported PPE/inventory cost reflects financing cost versus direct construction cost, and to compare capitalisation policies across entities with genuinely different funding structures.
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Whether an asset "necessarily" takes a substantial period to prepare – no bright-line threshold is prescribed Distinguishing genuine "active development" pauses (continue capitalising) from suspension periods (pause capitalising) Determining the point at which "substantially all" activities to prepare the asset are complete
SIGNIFICANT ESTIMATES
The weighted average capitalisation rate calculation for the general borrowings pool Allocating expenditure and borrowing costs when a mix of specific and general borrowings fund the same qualifying asset
Where an entity borrows specific funds but also has GENERAL borrowings, and spends MORE on the qualifying asset than the specific loan covers, the EXCESS expenditure is treated as financed by the general pool, using the weighted average capitalisation rate on that excess – a frequently tested combined scenario.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 23 vs US GAAP (ASC 835-20)
FeatureIFRS (IAS 23)US GAAP
Capitalisation requirementMANDATORY for qualifying assets – no policy choiceAlso mandatory, largely converged in substance
Investment income offsetRequired – investment income on temporarily invested specific borrowing proceeds is DEDUCTEDGenerally NOT required – investment income is typically NOT netted against interest cost eligible for capitalisation
Repetitively manufactured inventoriesExplicitly excluded from qualifying asset definitionSimilar exclusion in substance, though phrased differently
Assets measured at fair valueExplicitly excluded (e.g. biological assets)Similar practical outcome, though the exclusion is not framed identically
The investment income offset requirement is the clearest substantive difference – IFRS's netting rule for specific borrowings can result in a LOWER capitalised amount than an equivalent US GAAP calculation, where surplus fund investment income is typically NOT required to be deducted.
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Statement Mapping – Where Every Borrowing Cost Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Borrowing costs capitalised during active constructionSOFPAdded to the qualifying asset's carrying amount
Borrowing costs NOT eligible for capitalisation (ordinary financing)SOPLExpensed as incurred
Investment income on temporarily invested specific loan proceedsSOPL offsetDeducted from the capitalised amount, not shown as separate investment income
Capitalisation suspended (extended interruption)SOPLBorrowing costs during suspension are expensed, not capitalised
Capitalisation ceases (asset substantially complete)SOPL SOFPFuture borrowing costs expensed; asset begins depreciating per IAS 16
Carrying amount exceeds recoverable amountSOPL SOFPWritten down per IAS 36/IAS 2, including previously capitalised borrowing costs
Cash interest paidCash Flow StatementClassified per the entity's interest classification policy (IAS 7) regardless of capitalisation
Capitalised borrowing costs within investing activitiesCash Flow StatementCash paid for the qualifying asset (including capitalised interest) presented as investing outflow
Amount capitalised, capitalisation rate usedNotesMandatory disclosure
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Related Standards – Cross-Reference Map
How IAS 23 connects across the IFRS body of literature
StandardNature of the connection
IAS 16Most qualifying assets are self-constructed items of PPE; capitalised borrowing costs form part of the asset's cost base for subsequent depreciation
IAS 2Inventories requiring a substantial period to bring to saleable condition (e.g. maturing spirits) can be qualifying assets – but repetitively manufactured inventory is explicitly excluded
IAS 40Investment property under construction is a qualifying asset while under construction, before being remeasured under IAS 40's fair value or cost model once complete
IAS 41Biological assets measured at fair value less costs to sell are explicitly EXCLUDED from qualifying asset treatment, since fair value already captures economic reality
IFRS 9Supplies the effective interest method used to determine the amount of "borrowing costs" incurred on financial liabilities eligible for capitalisation
IFRS 16Finance charges on lease liabilities are included within "borrowing costs" and may be capitalised if the leased asset is itself a qualifying asset under construction
IAS 36Determines whether a qualifying asset's carrying amount (including capitalised borrowing costs) must be written down to recoverable amount
IAS 21Exchange differences on foreign currency borrowings, to the extent regarded as an adjustment to interest cost, are included within "borrowing costs" eligible for capitalisation
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Quick-Reference Glossary
Specific borrowings
Funds borrowed SPECIFICALLY for the purpose of obtaining a particular qualifying asset – allows direct tracing of actual borrowing costs.
General borrowings
Funds borrowed for general corporate purposes, not tied to any specific asset – requires the weighted-average capitalisation rate approach.
Substantial period
The undefined time threshold that determines whether an asset qualifies for capitalisation – a matter of judgement based on facts and circumstances, not a bright-line rule.
Active development
Physical construction or substantial administrative/technical work needed to prepare an asset for use – its interruption (beyond normal, necessary delays) triggers suspension of capitalisation.
Effective interest method
The IFRS 9 method of allocating interest expense over the relevant period, used to determine the "borrowing cost" figure IAS 23 requires for capitalisation.
Capitalisation rate
The weighted average interest rate applicable to the general borrowings pool, applied to qualifying asset expenditure to determine the capitalised amount.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Nov-1982
Exposure Draft E24 Capitalisation of Borrowing Costs
Mar-1984
IAS 23 Capitalisation of Borrowing Costs
01-Jan-1986
Effective date of IAS 23 (1984)
Aug-1991
Exposure Draft E39 Capitalisation of Borrowing Costs
Dec-1993
IAS 23 (1993) Borrowing Costs (revised as part of the 'Comparability of Financial Statements' project)
01-Jan-1995
Effective date of IAS 23 (1993) Borrowing Costs
25-May-2006
Exposure Draft of proposed amendments to IAS 23
29-Mar-2007
IASB amends IAS 23 to require capitalisation of borrowing costs.
22-May-2008
IAS 23 amended for 'Annual Improvements to IFRSs 2007 for components of borrowing costs
01-Jan-2009
Effective date of March 2007 and May 2008 amendments to IAS 23
12-Dec-2017
IAS 23 amended for 'Annual Improvements to IFRS Standards 2015-2017'.